In his ground breaking General Theory of Employment, Interest, and Money (1936), written at the time of the great depression, John Maynard Keynes created the policy tools for world economic growth in the post war period.
At a time of intense depression in the thirties, the goal of full employment when there was mass unemployment was like reaching for the stars. So the emphasis put on the consumption function, and government investment in infrastructure to get the economies moving was right and proper. At that time, Keynes’s view on saving as playing no positive role in supplying funds for investment was quite a practical proposition.
Seventy years later, the world is a different place. Near full employment is comparatively easier to achieve, but unfortunately it always seems to be accompanied by rising inflation. Now the emphasis is on expanding saving to restrain excessive consumption.
Saving in Asian countries has always been high, at least partly to provide for medical and other social services, which are not supplied by government. The only exception to this rule is that after many years of growth and increased consumption, saving has been falling steadily in Japan. In 2005, the Japanese household saving rate was down to only 3.2 per cent of household income, compared with 15 per cent in the early 1990s.
But the really profligate countries, as recorded by the Economist in 2005, are the five one time Anglo Saxon but now more multicultural, – America, Canada, Britain, Australia and New Zealand. These five, we’ll call them the spendthrift five – have the lowest rates of household saving of all the advanced countries.
To take an invidious comparison between thrift and spendthrift, among European countries France and Germany are the shining thrift twins. In 2005, net household saving as measured by the OECD in Paris was for France a surplus of 11.5 per cent, and for Germany, a surplus of 10.7 per cent.
For the spendthrift five, only one- Canada has a surplus in net household saving terms. In 2005, this was a surplus of 1.2 per cent, while America was in negative territory at -0.4 per cent and Britain at -0.1 per cent. The 2004 comparison for Australia was -3.7 per cent, but there has been some improvement since then. For New Zealand, the figures are mixed, but on one privately researched measure it could be at low as -17 per cent in 2006.
When you add federal government budget surpluses, which adds to net saving, while deficits in economic terms constitutes dissaving, of the spendthrift five America is on its own. If you compare United States with Canada, George Bush’s budget deficit in 2007 was over 3 per cent to GDP, while Canada had a budget surplus of over 1 per cent. The other three spendthrifts are running budget surpluses.
All the OECD countries have witnessed a run down in saving since the early 1980s, but in the spendthrift five, the run down has been at a much faster rate. Add in the demographic changes, which are rapidly occurring in the coming decade with the aging of the population, the saving dilemma becomes more acute as the years go by.
Four of the five spendthrifts have been running current account deficits for many years. This is the equivalent of net dissaving, as foreign capital has to be cajoled in making up for the deficiency in national saving. Canada is the lone exception with many years of external surplus, with the only blemish in 2008-09 when it will run into deficit.
American politicians are becoming quite vocal in criticism of foreign capital buying into icon assets such as prominent banks. The criticism is now moving into a full fledge backlash campaign. Apparently, it is ok for foreigners, particularly Asian and Middle East sovereign wealth funds to prop up the American Treasury in becoming the principal buyer of government securities.
But tottering banks buffeted by the winds of the international credit crunch should be sacrosanct. It may come as a surprise to the politicians that some of the banks involved are desperate for foreign capital, and there are few domestic investors prepared for the risks involved in taking up more stock.
A Brookings Institution study in 2006 had the title- Saving for the 21st Century: Is America Saving Enough to be Competitive in the Global Marketplace? The question really answers itself. In 2008, America is slipping behind, and it will fall more significantly behind in coming years, unless there is a transformation in saving. It all starts with individuals and spreads to governments, if the will of the people are prepared for the struggle to force increased saving.
The fictional character Wilkins Micawber from David Copperfield, who always lived in hopeful expectation was modelled on the author’s own father John Dickens, who was imprisoned in a debtor’s prison for failure to pay his debts. The result were these immortal words: “annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.”
Fortunately, there is no longer debtor prisons, otherwise there would be no place for the thieves and murderers. As someone once said: “the habit of saving is itself an education.”
For those living in the five spendthrift countries, and that includes the politicians need that education now. Time is too short to dilly dally.
This report has been commissioned by Scrooge in the belief that it is better at a time of negative saving to respect thrift than be a spendthrift.